Five years after the worst economic crisis since the Great Depression, developing nations confront a nasty pair of threats: an excruciatingly slow global recovery, and the tsunami of easy money that rich-world central bankers have unleashed as they try to revive their own economies.
The problems are interrelated and no one should fear them more ― or be more open to suggested remedies ― than Xi Jinping. China’s new president knows he needs better than 8 percent growth to maintain social stability in the world’s most populous nation.
It’s sobering that Bert Hofman, the World Bank’s chief economist for East Asia and the Pacific, senses a fundamental shift in China’s trajectory. He says China will be expanding only 6 percent to 7 percent by the end of the decade. Factory-worker grumbling about Communist Party billionaires will get much uglier when China’s export machine seizes up, and jobs disappear.
As China confronts the limits of a model that has raised living standards impressively over the past 30 years, Xi could do worse than look to South Korea. Others also could learn from a nation of 50 million people that seems to have figured things out.
China is great at economic hardware such as roads, bridges, airports and dams, but bad at software. It has yet to cultivate anything approaching cutting-edge industries based on ideas and knowledge to replace its legions of sweatshops.
Economists once leveled similar critiques at Korea. It rose from the rubble of war using exactly the same export-led strategy that Japan had before it, and China did after. Yet then, Korea reduced the government’s role in industry and moved beyond maintaining an undervalued currency, an obsession that skews incentives and exacerbates the risk of credit bubbles. Banks were freed to allocate credit more productively, while companies, deprived of state support, had to become more innovative and competitive.
Among the victims of the 1997 Asian crisis, Korea Inc. has used the past 15 years particularly well. Now Samsung Electronics Co. is all that stands between Apple Inc. and world domination. How many globally competitive Chinese companies can you name?
Korea succeeded by recognizing that the old playbook wasn’t working. Its flexibility helped the country avoid the “middle- income trap” that so many developing nations now face. That’s when per-capita income stalls at about $10,000, a threshold that China is approaching. The work is ongoing, with President Park Geun-hye working to support small and medium-sized enterprises to increase entrepreneurship and stimulate more job growth from the ground up, not just from the top down.
“So many developing nations can learn from what occurred here,” says Anne-Isabelle Degryse-Blateau, the United Nations Development Program’s Seoul-based country director. “While Korea has lots of work to do, it’s a role-model economy.”
Now Korea is shifting gears again, in the face of a new challenge. Desperation is leading central banks around the world ― most recently Japan ― to drive down rates to zero and provide unorthodox monetary stimulus as well. The Federal Reserve, the Bank of Japan, the European Central Bank and the Bank of England are all carrying out massive quantitative-easing experiments.
In times past, so much money sloshing around global markets would have led to the kind of hyperinflation that undid Weimar Germany. But the world faces a “liquidity trap” of exceptional severity. Since few households and companies have confidence to borrow or invest, and banks are reluctant to lend, monetary policy lacks the multiplier effect that once made it so potent.
Instead of spurring demand, ultra-low rates are creating a flood of hot money. All that cash has to go somewhere, and it’s ending up in Chinese junk bonds, Philippine stocks, Australian real estate and the Korean won. That’s why China’s frantic attempts to cool property markets have had little effect. Excess liquidity from the around the globe is seeping in, no matter what Xi does.
Smaller, open economies are even more vulnerable to giant asset bubbles that put livelihoods at risk. It’s a disorienting dilemma for officials such as Kim Choong-soo, who runs the Bank of Korea. He has been under intense pressure to follow the lead of Haruhiko Kuroda, his Bank of Japan counterpart: Politicians in Seoul are clamoring for Kim to cut interest rates in order to head off slowing growth, cap a strong won and soothe markets unnerved by North Korea’s tantrums. He’s stood his ground, clearly recognizing that monetary stimulus is useless in a world of zero rates. In doing so, he’s making the point that only fiscal policy offers a way out of this trap.
With his defiance, Kim has put the onus on the politicians, who last week served up a 17.3 trillion-won ($15.4 billion) stimulus package. The money will go a long way toward defending Korea’s export-reliant economy from the yen’s 20 percent plunge in the past six months.
More bold steps may be coming. Korea is considering ways to insulate itself from capital-flow volatility, possibly by imposing taxes on financial transactions. Fifteen years ago, Malaysia became a pariah state when it limited the flow of money. Today, it is common-sense economics to protect your country from being overwhelmed by central-bank largesse.
Developing Asia once spread financial contagion from New York to London and Tokyo. Now, as the world’s richest economies return the favor, Asian policymakers are grappling for ways to cope. They may find the best clues in Seoul.
By William Pesek
William Pesek is a Bloomberg View columnist. The opinions expressed are his own. ― Ed.